MILAN/LONDON, Jan 7 (Reuters) - European shares fell sharply on Thursday after China accelerated the depreciation of the yuan, but came off lows after the Chinese securities regulator said it would suspend its new stock market circuit breaker mechanism.

The pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX 50 index were both down around 2.2 percent by 1533 GMT, having fallen more than 3 percent earlier in the session.

Gerhard Schwarz, head of Equity Strategy at Baader Bank, said suspending the circuit breaker was a smart move because investors were nervous of not being able to sell.

"In the short term it will add to the volatility but in the longer term it might actually reduce it because nobody will have to rush for an exit," he said.

The People's Bank of China (PBOC) again surprised markets by setting the official mid-point rate on the yuan, also known as the renminbi (RMB), at 6.5646 per dollar, the lowest since March 2011.

Less than half an hour after the opening, Chinese stock markets were suspended for the rest of the day as a new circuit-breaking mechanism was tripped for the second time this week.

Investors have expressed fears that the yuan's rapid depreciation could mean China's economy, the world's second-largest, is even weaker than had been assumed.

The sell-off sparked a surge in the Euro Stoxx 50 volatility index which rose by as much as 4 points to its highest level since mid-December.

The worries over China hit mining stocks particularly hard, with Anglo American slumping 10 percent while Glencore fell 6.5 percent. China is the leading global consumer of metals.

Companies that export to China, such as carmakers, also fell sharply, with BMW down 3.8 percent. Financial stocks with Chinese exposure slipped too, with Standard Chartered and Aberdeen Asset Management down 1.9 and 8.6 percent respectively.

"The extent of the slowdown in China is certainly a worry. Investor sentiment is very fragile at the moment," said Terry Torrison, managing director at Monaco-based McLaren Securities.

Pandora stood out as a gainer, rising 3.7 percent after the Danish jewelry maker and retailer reported a 40 percent rise in 2015 revenues and outlined store openings for the coming years.

Today's European research round-up (Additional reporting by Danilo Masoni; Editing by Catherine Evans)